Teenage Wasteland

I don't need to fight
To prove I'm right
I don't need to be forgiven
--The Who

I've always regarded John Mauldin as a sharp cookie, but this recent missive is particularly good.

He likens our current predicament to that of teenagers who, as a general rule, are reticent to make choices that require sacrifice. We borrowed profusely from the future to live large in the present. Now, when the bills are coming due that we can't pay, we once again look for a painless way out.

This seems unlikely.

Because frugality and risk aversion are taking hold on social mood, he suggests that further borrowing and spending programs may not gain much traction. Moreover, the sheer size of our current debt obligations already seem unwieldy. Quoting page 3:

"As I’ve made very clear, deficits that are higher than nominal GDP cannot continue without dire consequences. Good friend Richard Russell writes today:

'The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let's say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof.'

"That would be at least 30% of the national budget. How would your household do, paying that much as interest? How can you operate when interest payments are 30% or more of the budget? Do you borrow to pay the interest? And the Obama administration openly admits to deficits of over a trillion a year for the next ten years, under very rosy growth assumptions. Anyone outside of Washington or who isn’t a rosy-eyed economist think we’ll grow 4% next year? I’m not seeing many hands go up."

The thesis as Mr Mauldin states it is deflationary. The consequences for risky financial assets, should this situation come to pass, seem readily apparent--and bearish.

One way or another, we teenagers are likely to grow up.

position in USD